News that both the Pfizer and Moderna Covid-19 vaccines have been 95% effective in trials has lifted the stock market over the last two weeks. The Cineworld Group (LSE: CINE) share price has risen by 65% over this period. But the group, which is looking for a rescue deal, is struggling with debt and could see cinemas close permanently, according to recent press reports.
Here, I’ll explain why I’m worried about the impact this news could have on Cineworld’s share price.
Covid-19 isn’t the only problem
Cineworld’s cinemas were forced to close during the first lockdown earlier this year. Although the UK estate reopened during the summer, major US markets, including New York, stayed closed. In October, the company decided to close all its UK and US operations after the latest James Bond film was postponed for the second time.
The group is now said to be looking for a financial rescue deal that could include rent reductions on cinemas and permanently closing some UK cinemas.
Without the coronavirus pandemic, I suspect Cineworld would have continued to trade well. But Cineworld’s share price fell by 30% between April and December last year. That suggests to me the market was already concerned about the group’s finances before Covid-19.
Great business, too much debt?
Cineworld founders Mooky and Israel Greidinger are said to be a passionate cinema fans. They’ve built Cineworld into the world’s second largest cinema chain, with a total of 9,500 screens at 787 sites.
It’s an impressive achievement, but the Greidingers have relied heavily on debt to build their empire. The group’s latest results showed net debt of about £6.2bn. That’s now becoming hard to manage, even with a vaccine on the horizon.
Reports that Cineworld is considering asking UK landlords for rent reductions don’t surprise me. The group’s big, modern cinemas come with big rent bills. With cinemas shut, the situation is serious.
Why I think Cineworld’s share price could fall
According to press reports last week, Cineworld’s UK operation is considering filing for a Company Voluntary Arrangement (CVA). This is a type of insolvency that’s often used by businesses wanting to cut their rent bills and close loss-making properties.
The idea is that, after completing the CVA, the remaining business will be able to operate profitably. However, as a potential shareholder, I have some concerns.
For now, I expect Cineworld’s landlords to agree to lower rents. New tenants would be hard to find. But if landlords are taking losses, I think shareholders will also be expected to share the pain. In my view, Cineworld will almost certainly need to issue new shares to raise funds at some point.
There are several ways this might be done but, in any scenario, I’d expect the new shares to be issued at a big discount to the current Cineworld share price. Shareholders who didn’t buy new shares could face big losses.
I don’t expect Cineworld shares to return to their historic highs. Indeed, I think that Cineworld’s share price probably has further to fall.
I won’t be buying these shares until I can see a clear solution to the company’s financial problems.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.